Sunday Train: Cap&Trade Funds should help finance the California HSR

An encore of a Sunday Train from 22 April, 2012, on a topic that has come back in the news

Burning the Midnight Oil for Living Energy Independence

One element of the recent California HSR "revised" draft 2012 Business Plan (which we shall call the Other, Other Plan) involves looking to one particular means of finance in addition to general fund bond finance and Federal transport grant funding:

Cap-and-Trade Program Funds
Assembly Bill 32 (Statutes, 2006, Chapter 488) mandates a reduction of statewide greenhouse gas emissions to 1990 levels by 2020. In accordance with that law, California will implement a market-based cap-and-trade program. Funds from the program can be used to further the purposes of AB 32, including for development and construction of the high-speed rail system.

This has led to the current controversy in which the California Legislative Analysts Office, the LAO, has argued that the Cap and Trade funds might not be usable for HSR (pdf: p. 8).

One of their points, "Other GHG Reduction Strategies Likely to Be More Cost Effective," involves a serious and common misframing of the question of the use of funds dedicated to reducing Greenhouse Gas Emissions: when reducing GHG emissions in a project that serves multiple purposes, the cost effectiveness of the GHG emissions spending depends on what share of the project funding is represented by that GHG emissions spending.

So more on transport, Green House Gas emissions, and the peculiar analytical weaknesses that crop up whenever the California LAO turns its attention to HSR, over the fold.

Funding Shares Matter

Lets consider three projects. A reduces CO2 at a cost of $20/ton. B reduces CO2 at a cost of $50/ton. And C reduces CO2 at a cost of $250/ton. Which one is the more cost efficient way to reduce CO2 emissions ?

Of course, you have no way of knowing, since you are missing a key piece of information: what share of funding is coming from the funds dedicated to reducing CO2 emissions:

If A is 100% funding, B is 80% funding, and C is 10% funding, then the order is A=$20, C=$25, B=$40;
If A is 100% funding, B is 20% funding, and C is 2.5% funding, then the order is C=$10, A=$20, B=$63

So, for projects that are only funded to reduce CO2 emissions, the evaluation is simple. But for projects that are "win-win-win" type projects, advanced and supported as helping with multiple goals, the question is:

what share of funding ought to come in support of its CO2 emissions reduction

Possible answers include:

As high a share as required may be spent on the project much as the project needs
Up to a share that allows the spending to be "reasonably cost effective", and
no share at all, the CO2 emissions reduction should be taken as a windfall gain.

This is a point ignored by Brad Plumer at the Wonkblog, when he raised the cost effectiveness point:

... Second — and more broadly — high-speed rail may not be the most efficient use of money that’s supposed to be used to combat global warming.
Some rough numbers help show this: The California High Speed Rail Authority claims that by 2030, if the train ran entirely on renewable energy, then it would start reducing the state’s carbon emissions by about 5.4 million metric tons per year. That would mean the rail network would cut California’s emissions at a cost of, at the very low end, $250 per ton of carbon dioxide over the ensuing 50 years, given the system’s current price tag. (This is being extremely generous, since it ignores the energy used to build the system — by some estimates, high-speed rail would actually increase emissions in its first few decades.)

And that’s a pricey way to cut carbon. To put this in perspective, research has suggested that you could plant 100 million acres of trees and help reforest the United States for a cost of somewhere between $21 to $91 per ton of carbon dioxide. Alternatively, a study by Dan Kammen of UC Berkeley found that it would cost somewhere between $59 and $87 per ton of carbon dioxide to phase out coal power in the Western United States and replace it with solar, wind and geothermal. If reducing greenhouse gases is your primary goal, then there are a slew of more cost-effective ways to do it than building a bullet train.

Now, in these price ranges, there are two things going into the range. First, there is a range uncertainty over the cost. But second, there is also an actual range of underlying costs: that is, if you start with the easiest, least expensive reforestation projects first, you are more likely to be down toward the $21/ton range, and if you keep it up, you are likely to climb toward the $91/ton range.

The second thing to bear in mind is that we really shouldn't have a price target, here: we have a quantity target. In the end, we are going to have to shut down coal electricity production sometime over the next twenty years, and the sooner the better. So if the cheapest to eliminate is $60/ton, and the most expensive to eliminate is $90/ton, then $90/ton would be a fair cost for eliminating CO2.

With Dan Kammen's study of roughly $60/ton to $90/ton, I'll take the mid-point for a fair cost of reducing CO2 as $75/ton or less.

What does this mean for HSR? If the full budget cost of reducing CO2 with HSR is from $250/ton to $400/ton, and a fair cost of reducing CO2 is $75/ton or less, then the fair share for Cap & Trade Funding for the $68b HSR project is from $12b to $20b.

The Optimist's Critique, and the Pessimist's

The optimist's critique of this is that this overstates the cost of reducing CO2: we can get much more progress made much more cheaply than these people are projecting.

Great! If we can, we are in much better shape than is currently being expected, and the urgency of getting the best possible deal for our CO2 emissions dollar is much lower ... and so if the optimist is right and its just not as big a deal as this ~ then funding an economically useful transport project on the basis of an inflated estimate of a fair cost of CO2 emissions reduction is a way of taking that unexpected windfall gain in advance.

On the pessimist's side, what if the actual cost per ton turns out to be substantially higher than the estimate. The risk, there, is that setting the "fair contribution" level too low will result in useful projects not going ahead because they need just a little bit more funding.

The thing about the pessimist's view is that it implies something about our future economy: it implies that we are, as a national economy, poorer than we would otherwise be, as the deferred bill for using our atmosphere as a dump turns out to be far higher than we expect. And in such an economy, I'm happy to be a bit restrained in funding for intercity transport and leave something in the kitty to help fund local transport.

After all, if the California HSR system can gain funding to get the HSR Initial Operating Service up and running, that's a legacy that can be used even if the balance of the route is never completed. Electrifying and upgrading the San Joaquin and Surfliner routes, together with regulatory reform, would allow a single seat, sustainably powered HSR ride from San Diego to Oakland, with a connection to electric mass transit at Oakland for San Francisco.

Now, that's not 3hrs LA/SF, but the need for 3hrs LA/SF assumes something like the status quo system: a pessimist's scenario might also involve rationing airline flights based on our supply of sustainable biofuel substitutes for aviation kerosene, in which case unrationed trips that are 5hrs LA/SF would have substantially more appeal than they do today.

In the end, if we make our best guess what the marginal cost of CO2 emissions reduction will be, and guess low, then projects funded on the basis of that low guess were a bargain. And if we make our best guess, and guess high, then the future is rosier than our best current guess, and we can afford to overpay a bit.

For myself, I'm comfortable with $12b Cap and Trade funding for the $68b HSR Phase 1, HSR from the Basin to the Bay and through operation on shared Regional HSR corridors through to SF-TransBay Terminal and LA-Union Station and Anaheim.

What's Up with the LAO?

One pitfall that Brad Plumer likely ran into is a relatively uncritical reading of the LAO report. This is similar to the relatively uncritical reception that CBO or Social Security Trustees reports or health economist's mathematical modeling receives at Wonkblog.

But the LAO report is, for whatever reason, grossly biased against HSR. It pretends to do a risk analysis of the HSR project, and while cataloging all of the risks that it can that stand between the project and completion, it ignores the risks of not building the project: the risk of standing pat with the current status quo of California relying primarily on intercity car and air travel.

Indeed, the LAO presents a case against using Cap & Trade funds for HSR funding, under the cover of analysing whether its would be permitted, but only in terms of compliance with provisions of the Cap & Trade legislation. It does not consider whether the objective of the legislation can be met without offering a large portion of the state population the opportunity to choose a carbon neutral transportation system.

After all, our current transport system surrenders national sovereignty in service of ensuring long term misery for large numbers of Americans in the future. We are exposed to the risk that we cannot afford to pay for the petroleum imports to keep it running, the risk that we cannot physically obtain the petroleum imports to keep it going, and the risk that we discover that we cannot afford the side effects of burning the petroleum to keep it going.

Those are some pretty big risks to be pass by without comment, especially when in the very same analysis you consider legislation passed in order to address the problem underlying one of those risks. Its like driving at high speed along the top of a butte, and ignoring the fact that we might go over the north cliff, or might go over the east cliff, but one way or another we are going to run out of level land to drive on.

Now, in a carbon neutral transport system, just as in our current, obsolete, transport system, most trips are local. And there are a wide variety of more sustainable local transport options, particularly when we set aside the fantasy of an efficient, effective, one-size-fits-all-trips solution. There is walking on well designed sidewalks, cycling, both on shared right of way and on cycleways, there are neighborhood electric vehicles, there are shared electric cars, there are city buses, there are buses on dedicated corridors, there are various types of modern trams and trolleys, there are electric trolley buses, there is electric local and regional heavy rail.

But when considering 200 mile trips, the choices narrow down. And when considering 300 mile to 500 mile trips, there are very strong advantages to electric Express HSR.

The challenge of electric Express HSR is that it is capital intensive, just as is new airport construction, and as is new express highway construction. In the case of California HSR, the capital costs sort out to:

Sticking with what is already there, under the current regime of running existing infrastructure down
Upgrading existing conventional rail corridors to be time-competitive to driving
- Sticking with what is already there, maintaining it in a state of good repair
- Express HSR
- New infrastructure for car and air travel

So in the basic economic case for Express HSR, it is essential to know whether new intercity transport capacity will be needed. The expectation that the HSR project is built upon is that California will experience population growth. In that case, the choice, at least under anything like current political institutions, will be how additional intercity infrastructure is provided, not whether.

Which highlight the risk that not only will California be stuck with its current obsolete transport system, but that it will spend funds on expanding a system that is already obsolete, and then will be forced to look for substitutes on an emergency basis.

As to why the LAO neglects this massive status quo bias ~ I do not know. Speculations abound as to technical capacity or motivations of key players, but I am, as always, an outsider looking in, and I don't have the basis to even guess.

But it is a massive blind spot in their analysis, and it is important to be aware that, given their blind spot, their conclusions have to be taken with more than a few grains of salt.

Now, the floor is open for discussion

As always, any topic in sustainable transport is on-topic in the Sunday Train. So feel free to take about CO2 emissions reduction, energy independence, suburban retrofit and reversing the cancer of sprawl over our diverse ecosystems, or the latest iPhone or Android app to map you bike ride. Whatever.

The Sunday Train doesn't really leave the station until you jump in and join the conversation so ... All Aboard!

Midnight Oil ~ The Dead Heart